Feds offer $5 bil. to shore up early retiree coverage

WASHINGTON -- Trying to entice employers to keep early retirees on their medical plans, the Obama administration announced Tuesday it's making $5 billion available until the safety net of the new health care law is in place.

Effective next month, federal subsidies will allow employers to recoup a big chunk of the cost of medical claims for retirees ages 55 to 64 not yet eligible for Medicare.

Older baby boomers working for large companies -- and looking to downshift to less-demanding employment-- could be immediate beneficiaries.

However, in the long run, experts predict that President Barack Obama's health overhaul will accelerate the decline of employer-sponsored retiree coverage, by making it easier for people to find and keep affordable coverage on their own, as well as improving Medicare benefits.

Starting in 2014, the health care law forbids insurers from denying coverage to people with medical problems, limits what the companies can charge older individuals, and sets up competitive health insurance markets where consumers can buy a policy, in many cases with direct government assistance. Early retirees will have options they don't currently enjoy.

"Employers have been offering these benefits because there is no alternative source of coverage," said economist Paul Fronstin of the Employee Benefit Research Institute. "I think they're going to be asking themselves why they should continue offering retiree coverage."

Preventing employers from rushing to the exits now is one of the main goals of the new subsidy program, authorized under the health care overhaul law. Among employers with 500 or more workers, only 28 percent offer health benefits to early retirees, down from 46 percent in 1993, according to Mercer, a benefits consulting firm.

"This is going to be a welcome reform for many businesses trying to do the right thing by their retirees, and for the retirees as well," Obama said Tuesday, addressing a business group.

Under the program, employers can get reimbursed for up to 80 percent of the cost of medical claims between $15,000 and $90,000 for their early retirees. The money can be used to reduce premiums for retirees and their dependents, or by employers to keep their own costs in check. The benefit takes effect June 1.

Large companies and labor unions successfully lobbied to include the subsidy in the broader health overhaul. Nearly 2 million people ages 55-64 currently have health insurance through a former employer.

"The early retiree program reduces costs and allows many of our member companies to continue providing this critical coverage," said John Castellani, president of Business Roundtable, which represents chief executives.

Employers are expected to sign up without delay. Congress set aside $5 billion to finance the benefit until Jan. 1, 2014, but it's unclear how long the money will last.

Looking to 2014 and beyond, employers are reassessing whether passage of the overhaul law will let them phase out retiree coverage.

In addition to subsidies and new health insurance markets, the legislation improves Medicare benefits by gradually closing the prescription drug coverage gap called the "doughnut hole." That will benefit retirees over age 65. Even now, some companies are starting to provide their retirees with a fixed payment for health care, a voucher that limits their own exposure.

"It begs the question whether employers really need to be in the retiree game at all," said Ron Fontanetta, a principal with the benefits consulting firm TowersWatson.